Smartphones could hurt bottom line, analysts say

While smartphone adoption has helped the wireless industry weather the economic recession thus far, the high-end handsets might be a mixed blessing in 2009. In a webinar held today to outline next year’s expected communication trends, Yankee Group analysts said that highly subsidized smartphones could hurt operator profits in 2009, although the overall industry will continue to benefit if innovation and investment continues.

“Companies willing to make the leap to invest in technologies can put themselves in a great position,” said Zeus Kerravala, senior vice president of research at the Yankee Group. “Those that do focus on cost-cutting and not innovation will come out of this downturn in a weak position. Looking back, we will look at next year as a watershed year for a lot of these changes.”

The Yankee Group outlined six burgeoning telecom trends, each with subsequent winners and losers, in today’s webinar. Vice President Declan Lonergan predicted that premium wireless handset brands will lose their market share in 2009, the effects of which will outlast the economic downturn. Consumers might never kick the mobile habit, but they will postpone their handset upgrades and re-evaluate lower-priced brands, he said. As a result, the winners will be the low-priced players, mobile operators that can offer tangible benefits and value-based mobile virtual network operators – essentially any company that facilitates experimentation and offers consumers new promotion and subsidized equipment. Premium brands like Apple and the Nokia Nseries, which are not the price leaders, will be challenged.

While subsidies may be driving the uptake, they are also strangling operator profits, according to Ashvin Vellody, Yankee Group senior vice president. Nearly every handset manufacturer has introduced their own version of a feature-heavy touch-screen device, but these have also required heavily subsidized two-year contracts to remain competitive. The sales might help the handset makers, but they will also adversely impact the carriers’ products next year, Vellody said.

“We recommend data transparency in looking at subsidies and finding out what best works for the entire ecosystem,” he advised. “It requires device OEMs and operators to be open to different business models. We urge operators to look at traditional two-year contracts and try to offer this product in a different business model rather than the traditional.”

Despite smartphones challenged position, the real battle in 2009 will be waged by landline carriers combating a growing number of cord cutters. This existing trend too will be a short-term development with long-term effects, Lonergan said.